Having finished the financial auditing of 2023, the results can be assessed as positive. First, all 26 audit opinions presented are unqualified. It can be explained both by the good quality of accounting records and by the cooperation of auditors and institutions during financial audits. Thanks to this cooperation, state institutions corrected the errors found by the auditors, the number of which reached 140 and totalled to 1.4 billion euros this year, which is the largest amount of corrected errors in one cycle of financial auditing so far.
BRIEFLY
- Overall, the results of the financial audits for 2023 are positive, as we can publish the results a month earlier than before, all 26 audit opinions are unqualified, and the number of recommendations has decreased by more than half compared to last year.
- During the audits, about 140 errors with a total value of 1.4 billion euros were corrected.
- However, various irregularities and inconsistencies have been identified in several departments with regard to significant events of the year 2023, compliance with the requirements of laws and regulations and the progress of previously provided recommendations.
- On 25 April 2024, the State Audit Office of Latvia will organise an informative and educational workshop dedicated to financial audits for financial employees of ministries and central state institutions for the first time.
Secondly, one has managed to deal with the challenge of financial audits for 2023, id est, financial reports had to be prepared and opinions on them had to be given a month earlier than before. Such changes in the Law on Budget and Financial Management were made with the aim of providing information to users of the report to the reporting year as close as possible. In order to meet the statutory deadlines, the State Audit Office of Latvia did not determine and assess the so-called compliance issues in the financial audits for 2023. However, both irregularities and inconsistencies were found while auditing the annual financial statements. And thirdly, ministries and central government institutions’ annual reports for 2023 were published in the e-services “ePārskati” of the State Treasury faster than the current law provides.
“A head of each institution is responsible for the drafting of financial statements in compliance with all "regulations". In its turn, the primary purpose of annual financial audits is to provide an assessment of whether these drafted financial statements can be trusted, that is, whether an annual report provides a clear and true picture of the financial position of an institution, its changes and the financial results of the institution’s activities in the reporting year and is drafted in accordance with the requirements of laws and regulations. To provide such an assessment, the auditors assess the risks, determine how many and what investigations should be performed, and obtain the necessary evidence. And only after completing all the scheduled procedures, a decision can be reached on the type of opinion whether the opinion can be given unmodified, qualified, or adverse, or the circumstances force us to refuse to give an opinion, that is, disclaimer of opinion” explained Ms Ilze Bādere, Council member of the State Audit Office of Latvia, the specifics of annual financial audits.
Establishment of a state-owned enterprise of defence department
In the Ministry of Defence, we assessed establishment of state-owned enterprise (SOE) of the defence department, “Valsts aizsardzības korporācija” Ltd (National Defence Corporation) established in 2010, the competence and financing of its activities as the key audit matter. The audit found that when founding the SOE, the Ministry of Defence planned state budget funds for its operation, but it did not determine suitable financing instruments for further financing. The audit concluded that at the time of establishment, the legislation did not provide for the competence of the Ministry of Defence that was determined for the newly established SOE, namely the management of investments in the national defence industry. During the audit, based on the proposals of the State Audit Office of Latvia, this mandate was determined for the Ministry of Defence in the third reading of the Defence Industry Regulation, also providing that the management of investments in the national defence industry and the coordination of processes related to the development of the production of military goods could be fully or partially delegated to “Valsts aizsardzības korporācija” Ltd. However, the prerequisites of the legal framework for the implementation of the directions and policy principles of the defence industry support, especially for ensuring industrial participation, have not yet been created. Therefore, we have called for the improvement of the policy of the defence and security industry and the development of a legal framework that would provide for the appropriate and controlled involvement of private individuals in the performance of the external and internal security functions of the state.
Significant information in institutional reports
We included the so-called paragraph to emphasise circumstances in the opinions provided to two departments, that is, the Ministry of Culture and the Central Election Commission by drawing attention to material information in the reports. In the case of the Ministry of Culture, we drew attention to the fact that the discussion with the State Treasury of Latvia about the appropriate recording of exhibits in the accounting was ongoing. To ensure uniform accounting in all institutions that have museum object “exhibits”, the Ministry of Finance has requested the State Treasury to draft the necessary regulations (amendments to the Cabinet Regulation or guidelines) on bookkeeping and accounting of buildings - both museum objects and immovable property.
In its turn, we drew the attention to a statement in the annual management report for 2023 of the Central Election Commission, that there were significant future events which could affect the value of intangible investment item and balance sheet of the Central Election Commission significantly in 2024, as conceptual decisions were made in the reporting year regarding changes in the future use of election management information systems because the State Regional Development Agency would be the developer of information systems necessary for elections in the future.
Determining remuneration for support function performers
In the Office of the Ombudsman, the Chancery of the President of Latvia, the Constitutional Court and the Supreme Court, we assessed determination of remuneration for those performing support functions. Although these state institutions are not obliged to classify positions according to the catalogue of state and municipal institutions established by the Cabinet Regulation and have the right to create their own position evaluation system taking into account the specifics of the job, they are still subject to the principles of determining monthly salaries provided for in the Law on Remuneration of Officials and Employees of State and Municipal Institutions (Remuneration Law) : 1) the value of a position (level of responsibility and complexity) should be determined; 2) linking an official’s (employee’s) individual qualification and work performance evaluation and skills with a monthly salary; 3) it should be taken into account that the specified monthly salaries must not exceed the maximum of the interval of the monthly salary group specified for positions of similar responsibility and complexity. However, it has been established that when determining the monthly salaries of employees who provided support functions in the institution, the Constitutional Court, the Office of the Ombudsman and the Chancery of the President of Latvia did not comply with the principles set out in the Remuneration Law. Some of the positions performing support functions were classified in higher monthly salary groups without unbiased justification than the value of the respective positions (level of responsibility and complexity), compared to positions of equivalent responsibility and complexity in other institutions. The Constitutional Court has not determined the procedure (internal legal framework) in which monthly salary groups were determined for employees.
Progress in implementing the previously issued recommendations
In the financial audits, we also evaluated the implementation of the previously provided recommendations in the Ministry of Transport, the Ministry of Justice, and the Ministry of Defence. The Ministry of Transport failed to achieve the goal of the recommendation given after the financial audit for 2022 to organize the accounting of investments made in the implementation of the Rail Baltica project. It was recognized as not being implemented; new recommendations being made instead. In 2023, the Ministry of Transport did not draft/propose amendments to the laws to address the issue of investments made in the implementation of the Rail Baltica project in properties belonging to other persons, when they were rebuilt and replaced without compensation because it was impossible to avoid their damage or relocation. Such a legal framework is needed to prevent potential risks of illegal and inefficient use of budget funds of the Ministry of Transport. Taking into account the scale of the project, the state obligations undertaken with its implementation and the specific nature of its implementation, a separate accounting procedure for the Rail Baltica project should be developed for the entire project life cycle. It would contribute to the fact that the transactions related to the implementation of the Rail Baltica project, presented in the accounting records and the annual report of the Ministry of Transport, comply with the laws and regulations.
When checking the activities of the Ministry of Transport for the implementation of the recommendation given in the financial audit for 2021 regarding the monitoring of the fulfilment of the provisions of public transport service contracts, the recommendation was recognized as implemented, however, during the assessment of the implementation of the recommendation one found a non-compliant action of state-owned “Autotransporta Direkcija” Ltd (Road Transport Directorate) resulting in the contractual penalties received from public transport service providers not being paid into the state budget. Up to the end of January 2024, the service providers had paid 20,410 euros or 70% of the total amount of the contractual penalty imposed in 2023 into the account of state-owned “Autotransporta Direkcija” Ltd, which were not further transferred to the state budget. To prevent inappropriate actions in the collection of contractual penalties in the future, the State Audit Office of Latvia made a new recommendation.
While implementing the recommendation of the State Audit Office of Latvia, the Ministry of Justice has created a prerequisite (internal regulation) so that the bonuses of the State Land Service and the Court Administration for a significant contribution to the achievement of the institution’s strategic goals comply with the Remuneration Law. However, the audit findings show that this bonus is still basically granted for the performance of additional duties and daily duties in the Court Administration.
The Ministry of Defence has ensured that three of the four recommendations presented in the interim audit report “Food procurement planning and implementation of the National Armed Forces” have been recognized as implemented. The work is still ongoing so that the defence department has transparent and operationally usable information about the planned procurements and their funding for decision-making.
Challenges for the future
“Financial audits play a fundamental role in the proper management of public resources. Through the assurance provided about the reliability of the reports, they form the basis on which we stand and from which we can spring back when planning and conducting compliance and performance audits. At the same time, financial audits have a huge potential in the future, in addition to classic audits of annual reports, to provide a horizontal insight into the accounting of certain expenditure items, to evaluate the approach to the purchase of various goods and services, to provide an assessment of the promised and achieved results by using the allocated budget funds. We continue to work towards such a future by implementing the internal project of the State Audit Office of Latvia “Provision of a single report by an independent auditor in financial audits during the audit of an annual financial statement”. We will talk about this and other issues related to financial audits to the responsible employees of state institutions at an informative and educational workshop on April 25, which we are organizing for the first time this year,” stressed Ilze Bādere.
Recommendations #PēcRevīzijas
After the financial audits, the State Audit Office of Latvia has provided 10 recommendations, 7 of which should be implemented by the end of 2024 and 3 recommendations by the middle of 2025. Compared to 2023, the number of recommendations is twice as low.
All 26 audit reports on the accuracy of the annual financial statement of state institutions are available in Latvian on the website of the State Audit Office of Latvia www.lrvk.gov.lv in section “Completed audits”.
Additional information
Ms Signe Znotiņa-Znota
Head of PR and Internal Communication Division
Ph. + 371 26440185 | E-mail: signe.znotina-znota@lrvk.gov.lv